Message Font: Serif | Sans-Serif
UnThreaded | Threaded | Whole Thread (8) | Ignore Thread Prev | Next
Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Re: Tax on Rollover/Conversion Date: 1/18/1999 7:16 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
[[I have some money in a former employer's 401k program that I am in the
process of rolling over to a Rollover (Traditional) IRA.]]

Good deal...

[[ My question is, if I
decide to convert this into a Roth, and it gets taxed, does the tax money get
taken out of the amount in the IRA, or do I just owe the taxes come tax time
next year? Thanks!]]

It doesn't automatically come out of the IRA. You would have to make that decision. And if you do make that decision, you'll owe taxes and penalties on the difference.

If you don't have the funds elsewhere to pay the tax on the conversion, it is a strike against you when you consider moving from an IRA to a Roth. Let me give you an example...

Say that you have a $20k IRA (all taxable, let's say). Lets say also that you are in the 28% bracket.

Your conversion will cost you $5,600 in taxes. You decide that you don't have the funds availabe to pay these taxes, so you simply convert $14,400 to your Roth IRA, and remove the other $5,600 to pay the tax.

Not only has your Roth IRA investment base been depleted substantially, but you'll now owe PENALTIES on the $5,600 "early" distribution (assume that you are under age 59 1/2) to the tune of $560 (or 10% of the distribution not converted). So this could be a pretty heavy price to pay.

So you might want to give this a bit more consideration before moving on it. You can also read more about the Roth IRA (and the decision making process) in my series of posts on the Roth IRA in the Taxes FAQ area.

TMF Taxes

Want to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Be the first one on your block to own this masterpiece. It'll help you with your 1998 taxes, and it's never to early to start planning for your 1999 taxes. So just click on this link ( to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on and you'll be right at the home page. Check it out. Finally, if you need to get to the IRS web site, click on to go directly there.
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (8) | Ignore Thread Prev | Next


In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
Post of the Day:
Value Hounds

Medallion Financial: TAXI!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.